EXECUTIVE SUMMARY

A senior management accountant’s role in general is more than a middle range manager

i.e. an accountant. The accountant is sets up and keeps track the accounting transactions,

prepare the financial reports etc. Whereas, a senior management account played a significant

role in the strategic decision making. It may be time to bring in a senior management

accountant to assist the four directors of Jessup Ltd with no professional in the management

accounting.

Relevant cost and revenue is important for Jessup Ltd to make strategic decisions

especial when the company starts growing fast. The concept relevance of cost is the ensure

that the management of Jessup Ltd focuses its attention on a decision’s relevant information.

As Jessup Ltd is growing fast in the industries, it needs a useful decision making

framework such as activity based costing to receive a better accuracy and relevant data. The

major advantage of implementing ABC for the company is the cost can by trace by activities;

therefore, Jessup Ltd has a fairer picture of the cost in between their two different services i.e.

advertising and public relation. With this better information, Jessup Ltd may take this

competitive advantage for making decision to sustain the growth in the business.

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CONTENT Page

JESSUP LTD

1. Introduction………………………………………………………………………………… 3

2. Key Role of Strategic Management Accountant…………………………………… 3

3. Relevant Cost And Revenues For SMA Decision Making………………………. 5

4. The Merits and Limitation of Introducing Activity Based Costing…………… 8

5. Conclusion……………….…………………………………………………………… 11

Reference list………………………………………………………………………………… 12

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REPORT

To : Board Of Directors

From : Senior Management Accountant

Date : 10th January 2011

Title : Report on the strategic management accountant’s roles, cost relevancy in decision-

making and introducing activity based costing

1. Introduction

This report is written to highlight below issue:

a) The key role played by strategic management accountant in our company.

b) Relevant cost and revenue in Strategic Management Accounting decision making.

c) The merits and problems of introducing activity based costing (ABC) in our

company.

2. Key Role of Strategic Management Accountant

When the company starts growing and become established, it will face greater

challenges as the business context being an uncontrolled turbulent world in reality.

Hence, the integration of advance information technology and new management tools

has become a useful “weapon” for a company to sustain in the business. At the same

time, the role of the management accountant has changed, some of the traditional

works “replaced” by a new opportunities, such as involve in the company management

(Baldvinsdottir et al 2010, p395).

The company’s strategy is a continuously cycling four stages process (Shank 1989)

and the strategic management accountant played a significant role in each stages:

a) Formulating strategies

There are numerous of analysis tools that the strategic management accountant

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can use in order to helps the directors to formulate the corporate strategy.

For example, the strategic management accountant may use analysis tool such

as SWOT, PESTEL and Porter’s 5 forces to helps the directors to understand the

environment that the company operates in before decide the strategy for the

company (William 2009).

The strategic management accountant also can undertake an assessment of

competitor’s strengths and weakness by using SWOT. Both will include the financial

and non-financial information. An professional strategic management account will

collection all of these information in a systematic way and reporting it so that the

directors could easily understand it and make use of such information (Smith 2007).

At the same time, the strategic management accountant would also prepare the

competitors’ product strengths and weakness analysis in order to study their product

and highlight their products strengths by analyze element such as estimation of

material, labor and overhead of competitors’ product (Smith 2007).

b) Communicating the strategies throughout the company

To facilitate speedy implementation of the new strategies, there must be an

effective means of communication throughout the company. The strategic

management accountant can help to ensure that all of the accounting information

to updated regularly (Smith 2007).

c) Developing and carrying out tactics to implement the strategies

During the implementation if the strategies, the strategic management

accountant should monitors closely the stages of implementation are follows as

what have been plan.

d) Developing and implementing controls

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It is import role for the strategic management accountant to compare the strategy

plan against the actual results and report to the directors. Performance

measurement if one of the comparison methods can be adopted. In this process, the

strategic management accountant needs to analyze financial and non-financial

performance measures and gather all evidence (Smith 2007).

3. Relevant Cost And Revenues For Strategic Management Accounting Decision

Making

The management accountant has to support the board of directors in making strategic

decision with quality information. The quality information must be useful for decision,

objective, accurate and relevant. In order to collect relevant cost and revenue, below

three main criteria must be met:

a)Predicted future cost or future revenues

Future cost and revenues can affects the current decision as they are controllable,

avoidable and relevant.

b)Differ among the alternatives being considered, also call incremental cost or revenue

In the relevant costing process, the management shall compare the incremental

revenues and incremental cost of the alternative choices. The incremental cost will

normally be a variable cost, but in certain cases where incremental fixed costs may

also occur.

Opportunity costs are the benefits forgone due to one action be chosen over the

other. The costs are relevant cost but somehow they may be difficult to obtain.

c)Cash cost only

The relevant costing process excludes all non-monetary cost such as depreciation.

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On the other hand, the irrelevant costs are as useless in decision making such as the

sunk cost (the historical cost that can not change no matter what decisions have be

made), depreciation (non-monetary cost) and fixed cost (constant cost that does not

affected by the decisions making) (Strategic Management Accounting, University of

Sunderland p.24)

Strategic decisions usually involve the long term and have significant effect on the

company. The relevant costing is important for strategic decision making. It helps the

directors to focuses on relevant cost and revenue associated with each decision

alternative Below are the illustration of relevant costing in strategic decisions:

a)Outsource decision

The company’s advertising division has too many projects and facing major

problems of not enough resources. One of the project that is to make advertisement

for its customer. The information of the project as follows:

£

Project Revenue 100,000

Expenses

Salary for the project team 30,000

Salary for temporary staff for the project 20,000

Purchase of the material used 30,000

Rental of the office 10,500

Marketing Overheads 5,000

Administration Overheads 7,000

Equipment depreciation 6,000

Earning from other projects if the team assigned to this project 30,000

The company is deciding whether to outsource this project to other advertising

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company, YY Ltd. The company quoted the contract of outsource to £ 60,000.

Item Relevant / irrelevant Reasons

Revenue irrelevant this is sunk cost

Salary for the project team irrelevant this is fixed cost

Salary for temporary staff relevant varies between alternative

cources

Material used relevant varies between alternative cources

Rental of the office, irrelevant this is fixed cost

Marketing Overheads irrelevant this is fixed cost

Administration Overheads irrelevant this is fixed cost

Equipment depreciation irrelevant this is non-monetary cost

Earning from other project relevant this is the opportunity cost

Outsource cost relevant varies between alternative cources

£

Project taken by in house project team

Salary for temporary staff for the project 20,000

Purchase of the material used 30,000

Earning from other projects if the team assigned to this project 30,000

Total cost 80,000

Outsource cost 60,000

Thus, the company should outsource the project to YY Ltd as the outsource cost is

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lower.

In the process of decision making, there are many qualitative and quantitative factors

are considered. Qualitative factors such as the company reputation, customer satisfaction

and stakeholders’ relationship etc should also be evaluated separately as the relevant

costing are shows only financial quantitative information .

4. The Merits and Limitation of Introducing Activity Based Costing

In this highly competitive global economy, it is important for our company to have

access to good information for decision making. Many firms have criticism the

traditional accounting approach does not provide relevant, timely and accurate

information (Mealah & Ibrahim 2007). Thus, many companies have implement ABC in

recent years as the numerous success stories (Malmi 1997 p.460). The basic idea of the

activity-based costing (ABC) is that activities consume resources and products consume

activities, these three elements are links together in cause-and-effect relations called

activity drivers (Emblemsvag 2007).

Service companies can benefits from using ABC as same as the manufacturing

companies such as analyzing the cost. In generally, the fixed cost is service companies

are more common rather than direct cost in manufacturing companies (Berts &Kock

1995). For example, our advertising staff may in charge a few customers at the same

time, hence staff cost are shared in the projects.

Smith (2007 p.427) states that the steps for implementing ABC are:

a) interview managers to determine resources and establish activities,

b) collect overhead costs by activities into activity cost pools,

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c) determine what drives the cost in each activity pools

d) calculate cost driver rate for each activity cost pool

e) assign the appropriate cost driver usage for each product line.

There are numerous of advantage in implementing the ABC in our company:

a) ABC provides more accurate information than the traditional accounting approach.

The traditional approach using one to three volume-base cost driver such as labor

hour, machine time to allocate overheads to the product or service. Whereas, ABC

employs multiple cost driver to reflect cost-and-effect relationship between the

activity and the resources they consumes (Stapleton et al 2004).

b) ABC keeps track of the transactions and provides a better understanding of

overhead. DHL had use the ABC to track the growth in average cost per shipment. It

was surprisingly shown that the IT accounting, management and administration cost

had grown by a massive and much higher than the operation cost per shipment and

the sales. The company shifts the company’s concentration from putting pressure on

the couriers to be more productive to more controlling the overhead costs (Smith

2007 p.545).

c) ABC enables the company has a clearer picture what products, customer or service

and how it affects profitability. Such product/ service profitability analysis is

important for the company to make decision such as re-pricing, putting more effort

for cost reduction (Stapleton et al 2004).

d) ABC provides analysis of each function performed in the company and identify the

services needed by the customers. With a better understanding of customer

requirement, which is the most important element in service companies, the

management can set priorities between different services. This can improve the

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company’s services quality and increase our company reputation in the advertising

and public relationship industry (Berts &Kock 1995).

e) As our company is running two different services, ABC identifies the activities cost

of each service and provides relevant information for the service related decision

making (Stapleton et al 2004).

f) ABC is a useful decision making tools for economic analysis of development of new

products and improvements of existing product or service (Berts &Kock 1995).

g) ABC identifies the activities cost and eliminates non-value added activities in order

to achieve cost reduction (Stapleton et al 2004).

According to Stapleton et al (2004), the ABC holds the following limitations:

a) the ABC is a resource-consuming activity. It is costly for adopt ABC due to the

massive change in accounting.

b) The process of ABC is time consuming. The process takes time to prepare due to the

complexity.

c) It may not suitable for company with low overhead costs.

d) The cost incurred for implementing ABC may higher than the benefits.

e) Some manager may resistance to change and results poor labor relations in the

company.

Smith (2007) states that the practical problems that may occur when using ABC as

follows:

a) The decision on the choice of activities and selection of an appropriate cost driver

for each activity cost pool may be difficult.

b) Many companies have not historical data on the cost driver. Hence the analysis such

as overheads movement may not be conducted.

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c) Selection of appropriate software and having adequate system supports.

By implementing the ABC, our company can analyze more deeply the expenses

incurred and receiving accurate information of the cost for different services i.e.

advertising and public relations. This information allows for the pursuit of competitive

advantages to our company through the identification of relevant cost drivers and

activities.

5. Conclusion

In the context of the fast growing in the company, it is appropriate to bring in a

strategic management accountant to perform a dynamic role to help the directors in

managing the business. The traditional approach accounting’s capability is

questionable to adequate the directors for managing the turbulence changes in the

business environment. The relevant costing concept is important for preparing the

quality information which such information must be accurate, timely and relevant.

The activity based costing (ABC) is rely on this quality information to allow the

strategic management accountant to use modern analysis tool for helping the directors

in making strategic decisions.

Signed by

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Management Accountant

REFERENCE LIST

1. Gudrun Baldvinsdottir, John Burns, Hanne Norreklit & Robert Scapens 2010,

‘Professional accounting media: accountants handing over control to the system’,

Qualitative Researcg in Accouting & Management, Vol.7 No. 3 pp. 395-414, viewed 05

January 2011, Emerald Group Publishing Ltd, DOI 10.1108/11766091011072819

2. John K. Shank 1989, ‘Strategic Cost Management: New Wine, or Just New Bottles?’

JMAR, viewed 28 DEC 2010,

< http://miha.ef.uni-lj.si/_dokumenti3plus2/196128/Shank-1989-Strategiccostmanagement.pdf >

3. Ruhanita Maelah & Daing Nasir Ibrahim 2007, ‘Factors Influencing Activity Based

Costing (ABC) Adoption in Manufacturing Industry’ Investment Management &

Financial Innovation, Vol. 2, No. 2, pp. 113-148, ABI/INFORM Global, viewed 28 DEC

2010

4. Jan Emblemsvag 2007, ‘Using activity-based costing and economic profit to grow the

bottom-line’, Business Strategy Series, Vol.8 No. 6 pp. 418-426, viewed 05 January

2011, Emerald Group Publishing Ltd

5. Teemu Malmi 1997, ‘Towards explaining activity-based costing failure: accouting and

control in a decentralized organization’ Management Accounting Research, viewed 05

January 2011

< http://www.tecsi.fea.usp.br/disciplinas/5846/textos/pdf/towards.explaining.pdf>

6. Julia A Smith 2007, Handbook of Management Accouting, 4th edn, CIMA Publishing, UK

7. Drew Stapleton, Sanghamitra oati, Erik Beack & Poomipak Julmanichoti 2004, ‘Activity-based

costing for logistics and marketing’ Business Process Management Journal, Vol. 10 no. 5 pp.587-

597, viewed 05 January 2011, Emerald Group Publishing Ltd

8. Soren Kock 1995, ‘Implementation considerations for activity-based cost systems in service firms’

Management Decision, Vol. 33 no. 6 pp.57-63, viewed 05 January 2011, Emerald Group Publishing

Ltd

9. Kevan Williams 2009, ‘Essential Managers Strategic Management’ 1st edn, DK Publisng

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US

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